The FTC and DOJ have issued a joint statement describing the agencies' framework for analyzing mergers and acquisitions in the defense industry. The statement itself is quite short – just under two pages – and largely reiterates the approach outlined under the DOJ/FTC 2010 Horizontal Merger Guidelines (Guidelines). The statement does not provide any detailed new guidance regarding the substantive antitrust analysis conducted by the agencies; instead, the agencies' statement is most likely a response to the DoD's recent call for new legislation that would "fill in the gaps" in antitrust law and take national security considerations directly into account in the review of defense mergers.
What does it say?
The statement begins by noting that the DoD is "responsible for ensuring our nation's security and is in a unique position to assess the impact of potential defense industry consolidation on its ability to fulfill its mission." Furthermore, the agencies acknowledge that they "rely on DoD's expertise, often as the only purchaser," when evaluating transactions in the defense industry.
The statement continues by indicating that defense industry mergers are analyzed under the 2010 Horizontal Merger Guidelines, which are described as "sufficiently flexible" to address the particular characteristics of the defense industry, including high barriers to entry, the importance of R&D investment, and the need for surge capacity, a skilled workforce, and a robust subcontractor base.
Of particular importance, according to the statement, is ensuring that defense transactions do not adversely affect short and long term innovation, or current, planned, or future procurement. In this regard, the agencies note that "many sectors of the defense industry are already highly concentrated" and that "[o]thers appear to be on a similar trajectory." For such markets, the agencies note that the Clayton Act's "incipiency standard" (i.e., that merger enforcement should prevent competitive problems before they arise) is particularly important.
The statement also notes, again consistent with the Guidelines, that the agencies will consider as part of their analysis any procompetitive aspects of mergers or acquisitions in the defense industry, including economies of scale, decreased production costs, and enhanced R&D capabilities.
Finally, the statement concludes by emphasizing that while the agencies will give DoD's assessment "substantial weight in areas where DoD has special expertise," the "ultimate question" of whether the transaction should be challenged under the antitrust laws will be determined by the agencies. Accordingly, the statement declares that the agencies will not hesitate to challenge a defense industry transaction if it lessens competition (and thus has the potential to adversely affect national security).
What does it mean?
On its face, the joint statement is merely a recital of the status quo. It is well known that defense mergers – indeed, all mergers – are analyzed by the agencies in the context of the Guidelines. And, as is also well known, the DoD plays a particularly important role in the agencies' assessment of deals in and affecting the defense industry.
If anything the statement may slightly understate the significance of DoD in the process. It is certainly true that the DoD is often "in a unique position" to assess defense mergers, and that the agencies rely on the DoD (often because it is the only purchaser) to assist with their assessment. But perhaps more important for enforcement purposes, when the DoD is the only purchaser in a proposed transaction, it is more than just a source of expertise; it is the key witness in any potential challenge. If the DoD is unwilling to testify against a proposed deal, or actively supports the transaction, the agencies are far less likely to bring a case because it is very difficult to win a challenge without strong, well-supported customer opposition to a deal.
On the other hand, sometimes the DoD has concerns with a transaction that are not shared by the FTC or DOJ, as was the case with Lockheed Martin's acquisition of Sikorsky Aircraft late last year. After a preliminary review, DOJ decided not to challenge the transaction, but DoD expressed concerns in a policy statement issued by Frank Kendall, the DoD Under Secretary for Acquisition, Technology and Logistics. The DoD statement noted that while the Lockheed-Sikorsky acquisition did not "trigger antitrust concerns" under existing law, the DoD felt that the transaction raised "significant policy concerns" by creating a single contractor with dominance across several defense markets. The DoD called on Congress to "explore additional legal tools and policy" to address these concerns, specifically suggesting that "national security" be added as a consideration for the review of defense industry mergers and acquisitions.
Thus, the joint DOJ/FTC antitrust statement appears to be a direct response to the DoD's proposal. The agencies indicate that they share the DoD's concern about increasing concentration and are committed to protecting competition in the defense industry. The statement explicitly expresses the view that many defense sectors are highly concentrated and "[o]thers appear to be on a similar trajectory." And, as noted in the accompanying press release, the agencies' joint statement is meant to "reinforce the message" that they are "committed to preserving competition" in the defense industry "[i]n light of recent speculation about possible future consolidation…." Perhaps most important, the agencies make it clear that they believe they have the tools necessary to protect competition in the defense industry. "[The Guidelines] are sufficiently flexible to address DoD concerns that reductions in current or future competitors can adversely affect competition in the defense industry and thus, national security."
This message seems to have been well received by the DoD. Immediately following the joint statement, DoD spokesman Mark Wright said the Pentagon welcomed the agencies' statement, and would be withdrawing its legislative proposal. Although new legislation now seems unlikely, it is clear the DOJ and FTC will be closely examining any deal activity in the defense industry moving forward.